\"Buckets of Money\" Theory

[jreyno71]

New to WCI and have a couple questions - wasn't sure which forum to post this in.

I'm 34 years old, 5 years post-residency, 3 years post-fellowship. I am reading about the perils of whole life insurance on this website and am wondering if I made a mistake. I am already maxing out both 401k and my physician group's pre-tax profit sharing plan. I have a $1 million term life insurance policy, and a $1 million convertible life insurance policy (have converted 75% - $750,000 - over last 5 years). My financial advisor (whom I now realize is also an insurance agent) set up the strategy of "buckets of money" for retirement. One first maximizes 401k and profit sharing to have one "bucket", then puts money into whole life insurance to get the cash value at the end in a second "bucket". During retirement, one takes money from the 401k during up market years, and money from the cash value of the insurance policy during down market years. This made perfect sense at the time, since it appears mathematically obvious what happens to happens when you withdraw money from a 401k during a down market year and eat into principal.

I never knew of backdoor Roth IRAs until a few weeks ago by word of mouth and have been reading about them on the WCI website. I could probably fund a backdoor Roth for myself and most of one for my wife every year with the premiums on this whole life policy.

My question is two-fold: 1) This "buckets of money" strategy made sense at the time - one bucket for up market years and a second bucket for down market years. Is this a reasonable strategy? 2) If so, is there a better way to build the second "bucket" for down market years? For example, from what little of I know of  Roth IRAs, they appear very flexible in terms of what you can invest the money in. Is there some method of using a backdoor Roth to get a cash value in this second "bucket" of money to withdraw from in retirement during down market years? Or is that strategy completely bunk?

Appreciate any input - trying not to sound very naive. The consensus on WCI certainly favors Roth IRAs over whole life insurance for tax and flexibility reasons. But what about down market years in retirement and eating into principal?

 

[jfoxcpacfp]

Don't worry - we all have our areas of naivety (a.k.a. ignorance). There are no dumb questions except the ones you are afraid to ask.

That's a somewhat bastardized version of the Money Buckets visual that I've seen. The Money Buckets illustration is often done using 3 buckets for 3 time periods: short term is what you'll spend in the next 5 years, mid term is what you'll spend in the future, and long term is what you will leave to the next generation, but can be tapped if the other 2 buckets run dry.

What you have is a poor substitute (sales tactic) for what you really need: a financial plan. A portfolio is not a plan; it merely supplies some of the needs of the plan,which includes much more than simply saving for retirement. Your plan should be designed to have a safe source of money during down markets, yes, but that doesn't indicate a prescription for whole life insurance.

If you are spending what it sounds like you're spending on premiums, I would probably recommend cutting your losses and being thankful you found this site now rather than 10 or 20 years later. Yes, you should be contributing to backdoor Roth IRAs for yourself and your spouse.

[jreyno71]

Appreciate the reply!

So off the top of your head, what are some other options for safe sources of money during down markets?  And can any of them be funded with a backdoor Roth IRA?

[jfoxcpacfp]

When you work from a financial plan, we take a different approach. For example, if your plan indicates that you will not need the money in the next 5 years, then down markets do not matter (as long as you have a properly allocated portfolio and rebalance annually). A plan allows you to keep funds liquid and safe in the short term (next 5 years), when access to your money is more important than growth. It allows you to be fully invested in the long term (5+ years) when you need your wealth to grow. At retirement, we keep 2 years' worth of draw-downs liquid in addition to 5-year needs. The goal is optimum growth, minimum risk, but it cannot be accomplished in the best way possible without a plan to use as your roadmap. The plan will also indicate how much you need to put into that fund, how much Social Security will contribute to your monthly bills, the order of accounts to tap when you need to take distributions, and how to optimize taxes to help meet your lifetime goals.

A Roth IRA is just a tax-advantaged "container" for retirement money. It is another place to save. That is different from the funds in the Roth. The funds in the Roth are like the funds in other accounts you use to save. Think of the Roth as the vase, and the funds as the flowers. You'll take the flowers out when you need to (again, according to the plan), but the container remains. (Your planner is the lady with the green thumb.)

[The White Coat Investor]

This was simply a sales technique. You need a new advisor. Also read these posts:

https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/

 

https://www.whitecoatinvestor.com/12-questions-to-ask-before-purchasing-whole-life-insurance/

 

https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/

 

In my opinion, advising the purchase of a whole life policy prior to maxing out a backdoor Roth IRA is akin to malpractice. $750K of whole life? If that were me this happened to every person who ever googles the name of your advisor would know about the terrible advice he gave you. Heck, I got sold a $20K whole life policy and it ended up launching WCI.

[AlexxT]

I certainly agree that whole life policies are terrible, and that your adviser gave you bad advice in order to sell you a whole life policy.   However, as an overall strategy, almost everyone uses some variation of a "buckets of money" strategy for retirement, whether they use that term or not.

The buckets just refer to short term, medium term, and long term money.   For most people, index funds are the long-term bucket, bonds are a middle bucket, and social security and cash are the short-term bucket.  In retirement, you can think of the dividends from your index funds as part of your short-term bucket as well.   It can be a useful way to think of your long term financial strategy.

But you don't have to think of your money that way, that strategy doesn't require using a whole life insurance policy, and you  shouldn't have been sold a whole life policy.

[jreyno71]

Thanks all - helpful comments and confirms what I've started to suspect over this past week. I touched base with some of the more financially savvy partners in my group. I'm going to read WCI and Bobleheads, likely dump the whole life (only 2-3 years in), and make some course corrections to get back on the right track here.

Consider another "soul saved"!  Great stuff on this website - I stumbled across it by word of mouth and wish I had been reading this from the beginning.